The multiemployer plan financial crisis – effect on single employer plans

June 06, 2017

In what follows, we outline the multiemployer plan financial crisis and discuss proposed solutions to it. At this point it seems likely that any ultimate solution (if there is one) will involve some sort of federal bailout.

That bailout could possibly involve single employer plans in some way. For instance, Senator Sanders’s KOPPA proposal (discussed below) would fund multiemployer plan benefits by: (1) transferring assets from the PBGC single employer program; and (2) capping contributions to defined contribution plans, to generate tax revenues to pay for direct federal Treasury funding.

The PBGC multiemployer crisis

The PBGC multiemployer plan insurance program, which (to a limited extent) insures benefits of failing multiemployer plans, is in serious financial trouble, and has been for some time. The following table (taken from PBGC’s 2016 annual report) shows the assets/liabilities/net position for 2016 and 2015:

PBGC Multiemployer Program Net Position
(in millions)
2016
2015
Total Assets $2,204 $1,924
Total Liabilities $61,037 $54,208
Net Position ($58,833) ($52,284)

Thus, just from 2015 to 2016, PBGC’s multiemployer program deficit increased by 10%.

At $59 billion, the PBGC multiemployer program deficit is 3 times as big as the single employer program deficit. But the problem is not just the gross size of the liability. While the single-employer program has nearly $86 billion in assets and $6.4 billion in annual premiums, the multiemployer program has only $2.2 billion in assets and $282 million in annual premiums. Thus, the multiemployer program may as well be unfunded.

Finally, PBGC estimates it has another $19.5 billion in “reasonably possible” multiemployer program liabilities not included in these numbers.

Thus, under current rules, there is no solution to PBGC’s multiemployer problem. The program is headed for insolvency – PBGC estimates a greater than 50% likelihood it will run out of funds by 2025.

The broader multiemployer plan problem

The financial condition of PBGC’s multiemployer program is one manifestation of a broader multiemployer plan funding crisis. PBGC’s multiemployer plan program guarantees (which underlie and drive the multiemployer program deficit) are relatively modest.

A significant amount of multiemployer plan benefits/liabilities are not insured by the PBGC. Thus, the precarious financial position of the PBGC multiemployer program is considered – by those seeking to “save” the multiemployer plan system – only part of the problem. They also want to save multiemployer plans or (at least) increase guarantees.

Finally, much of the multiemployer plan crisis is focused on two industries – coal and trucking – and on the United Mine Workers of America (UMWA) Pension Plan and the Teamsters Central States Fund.

Proposed solutions

In 2014, Congress passed legislation (as part of 2014 omnibus spending legislation) that allowed certain distressed multiemployer plans to (among other things) cut back benefits to current retirees. Oversimplifying somewhat, to implement such a cutback a plan’s trustees have to, among other things, submit a cutback proposal to participants for ratification and get approval from the Secretary of Treasury. After denying several cutback requests (including one from the Central States Fund), the Secretary of Treasury, in December 2016, granted its first approval, to an Iron Workers local fund.

The possibility of cutbacks has been very controversial. Since 2014, there has been significant pressure for some sort of bailout that does not involve cutbacks. Two bills have been introduced in Congress, one targeting the UMWA plan and one (sponsored by Senator Sanders) providing broader relief. Finally, the Teamsters are circulating a proposal that has not yet been published.

In what follows we briefly review these proposals.

Sanders KOPPA proposal

On May 9, 2017, Senator Sanders (I-VT) introduced the Keep Our Pension Promises Act (KOPPA); parallel legislation (H.R. 2412) was introduced in the House by Representative Kaptur (D-OH). The Senate bill has 9 (all Democratic) co-sponsors.

KOPPA would:

Repeal the provision of the Multiemployer Pension Reform Act of 2014 allowing cutbacks in the benefits of current retirees.

Modify the multiemployer plan partition rules, including a provision to (in effect and oversimplifying) increase the guaranteed benefit to 80% percent of single employer plan guaranteed benefits.

Promote the priority in bankruptcy of multiemployer plan withdrawal liability.

Create a new “legacy fund” to pay “administrative and benefit costs to the [PBGC] arising from [multiemployer plan] partitions.”

Provide for funding of the (new) multiemployer plan legacy fund through: (1) “closing” the “tax loophole” that provides for the nonrecognition of certain like-kind exchanges; (2) capping total DC and IRA balances at $5 million; and (3) transferring amounts from other PBGC funds (the main one being the single employer fund) “as the [PBGC] determines appropriate.”

Connecting the dots: this proposal would (1) increase PBGC multiemployer plan guarantees and then (2) fund the guaranteed benefits of distressed plans out of tax revenues produced by capping single employer DC plan (and IRA) contributions and transferring assets from the PBGC single employer fund.

The latter proposal –in effect to use PBGC single employer funds to pay multiemployer plan benefits – is unprecedented. Indeed, it is currently prohibited under ERISA. This proposal has intensified concerns expressed by a number of single employer plan sponsors that PBGC single employer plan premiums are unreasonably high and are, in effect, creating a single employer fund surplus. That surplus has now become a policy target – a funding solution for unrelated issues (in this case, the multiemployer plan funding crisis).

Miners Pension Protection Act

On May 11, 2017, Senator Manchin (D-WV) introduced the Miners Pension Protection Act (S. 1105), which would transfer excess funds under the Surface Mining Control and Reclamation Act of 1977 to the 1974 UMWA Pension Plan “to pay benefits required under that plan.” This proposal, obviously, would only help one plan (1974 UMWA Pension Plan), but that plan is one of the two big ones threatening PBGC multiemployer program solvency. Thus this legislation would partially relieve PBGC’s multiemployer problem.

This legislation has 21 Senate co-sponsors, including 3 Republicans. An attempt to get a version of it included in recently passed (April 2017) omnibus spending legislation failed. But, obviously, there is broad support for it.

Teamsters proposal

The Teamsters are reported to be circulating a proposal that would create a private corporation that would loan money to distressed multiemployer plans. The corporation would be financed by bonds that would be guaranteed by the federal government.

We don’t have a lot of specifics on the Teamsters proposal yet. But (as it has been described in the press) it looks pretty much like a loan of federal money to distressed multiemployer plans to pay benefits, with (in many cases at least) little prospect of repayment.

In April, Teamsters officials met with President Trump “to seek support for the union’s efforts to ensure pension security for Teamster members and retirees.”

Outlook

Given current political gridlock, passage of legislation providing some sort of federal multiemployer plan bailout seems unlikely. Such a proposal would certainly face significant Republican opposition.

It’s worth noting, however, that many of the participants affected by the multiemployer plan crisis belong to one of President Trump’s key constituencies. And there is meaningful (if no where near majority) Republican support for the bailout of the Mine Workers plan.

If, e.g., as part of some sort of compromise, a federal multiemployer plan bailout were to move forward, then the Sanders proposal for funding it – tapping the PBGC single employer program and capping retirement accounts at $5 million – may have some appeal.

We will continue to follow these issues.

October Three Consulting, LLC is a full service actuarial, consulting and technology firm that is a leading force behind the reemergence of defined benefit plans across the country. A primary focus of the consultants at October Three is the design and administration of comprehensive retirement benefits to employees that minimize the financial risks and volatility concerns employers face.

Through effective plan design strategies October Three believes successful financial outcomes are achievable for employers and employees alike. A critical element of those strategies is the ReDB® plan design. The ReDefined Benefit Plan® represents an entirely new, design-based approach to retirement and to the management of both the employer’s and the employee’s financial risk, focusing on maximizing financial efficiency and employee value.

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